Suthers v. Booker Hospital District ( 1976 )

REYNOLDS, Justice.

A scholarship fund, together with a hospital district and its residents claiming third party beneficiary status, instituted this suit to recover monetary damages from a medical doctor for breach of his written agreement with the scholarship fund to locally practice medicine for ten years in consideration for monies advanced by the scholarship fund for the doctor’s medical education. Consistent with the jury’s verdict, the trial court rendered judgment favorable to all parties plaintiff. The pivotal question is whether the written agreement was, and we hold as a matter of law that it was not, intended by the signatory parties to benefit directly the third party beneficiary claimants. Affirmed in part; reversed and rendered in part.

In 1966, Neal K. Suthers, then a student aspiring to become a medical doctor, entered into a written agreement with the Bulah Peery Memorial Scholarship Fund, Inc., a non-profit Texas corporation of Booker, Texas. Introductory recitations and paragraph I provisions are that the Scholarship Fund is agreeable to furnishing a scholarship of $200 monthly during the educational process not to exceed four years to Suthers, who in turn desires to come to Booker upon completion of his educational requirements to practice medicine as a licensed physician. The written agreement next states:

WHEREAS, the parties have made the following agreement and desire same to be reduced to writing in order to avoid any misunderstanding and to have a permanent record of the agreement.

And then it provides that:

II.

In consideration of scholarship agreement, Student agrees to use his best efforts, talent and ability to complete all of the necessary requirements to secure a license to practice medicine in the State of Texas, and agrees to thereafter immediately move to Booker, Texas, and practice medicine as a licensed physician for a period of not less than ten (10) years.

III.

It is contemplated that a diligent effort will be made by the citizens of the Booker community to initiate and complete the necessary action to create a hospital district as heretofore authorized by the legislature of the State of Texas, vote a bond issue and construct reasonably adequate medical and clinical facilities, including equipment so that adequate medical attention may be furnished the citizens of Booker and the surrounding vicinity. Such medical and clinical facilities shall not necessarily include a hospital. In the event such medical and clinical facilities are not furnished within a reasonable time after Student is licensed and willing to practice medicine in Booker, Texas, then the only obligation of Student shall be to reimburse all sums paid to him by the Scholarship Fund without penalty or interest within a reasonable time.

IV.

In the event Student either fails to complete the necessary requirements to secure a license to practice medicine in the State of Texas, or fails to complete the educational requirements of an accredited medical school, or after securing such license, fails to move to Booker, Texas, and actively practice medicine as a licensed physician for as long as five (5) years in Booker, Texas, then Student shall immediately reimburse the Scholarship Fund all sums paid to him with interest thereon from the time such monthly installments were paid at 7% per annum until paid, together with a penalty in a sum equal to 50% of all sums paid to Student as a scholarship. If Student complies with this agreement in all other respects, and actively engages in the practice of medicine as a licensed physician in Booker, Texas, for a period of more than five (5) years, but less than ten (10) years, Student agrees to immediately reimburse the Scholarship Fund all sums paid to him as a scholarship, without penalty, but with interest at 7% per annum from the date each respective scholarship payment was made. The condition of this scholarship shall be fully satisfied by Student in the event he fully complies with the terms of this agreement and completes the requirements for, and secures a license to practice medicine in the State of Texas, and does move to Booker, Texas, and practices medicine as a licensed physician for ten (10) years or more, whereupon Student will not in any manner be obligated to repay any money, including interest, to the Scholarship Fund advanced to him as a scholarship.

V.

It is understood and agreed that the Scholarship Fund shall carry and pay the premiums for a $10,000.00 convertible term life insurance policy on the life of Student for a ten (10) year term, payable in full to the Scholarship Fund in the event of the death of Student. In the event of death, the estate of Student shall not be obligated to reimburse any sum of money to the Scholarship Fund. At the end of such ten (10) year term, Student, if otherwise in compliance with this agreement, shall have the right to own the policy and all incidents of ownership and convert the policy as therein authorized. The Scholarship Fund shall have the right to carry disability insurance policy covering Student and payable to the Scholarship Fund in such amounts and upon such terms as the Scholarship Fund should deem necessary and advisable. . . .

⅜: * ⅜ ⅝ ⅜ ⅜

VIII.

This agreement shall be binding upon the heirs, devisees, legal representatives and successors of the parties and it shall not be assigned.

Thereafter and upon the second attempt to do so, the Booker Hospital District was created. After Suthers received his medical license in 1978, the hospital district constructed a medical clinic at a cost of $140,-000 following a voter authorized issuance of bonds to pay therefor. Upon completion of the clinic in the first part of March, 1974, Suthers, having completed his medical education with the aid of the scholarship amounting to $10,800, moved to Booker and began the practice of medicine in the medical clinic. Some five weeks later, Suthers ceased practicing medicine in Booker and moved to the State of Oklahoma where he has since practiced medicine.

Asserting a right under paragraph IV of the agreement to be reimbursed for the interest bearing $10,800 it had advanced to Suthers, the Bulah Peery Memorial Scholarship Fund, Inc., sued him for that recovery, but it did not seek the fifty per cent penalty mentioned in paragraph IV. The Booker Hospital District and nine of its residents, acting individually and on behalf of the class of residents and the subclass of resident taxpayers of the district, joined in the suit, alleging that the written agreement was made for their benefit as third party beneficiaries. Under that status, the hospital district and the subclass of its resident taxpayers pleaded for recovery from Suth-ers of that portion of the increased cost they attributed to Suthers in constructing the medical clinic, or its monetary decrease in market value, or its reasonable rental value during the remaining term of the agreement. The class of residents of the hospital district asked that Suthers be held liable for the monetary value of their loss of medical services. All parties plaintiff alleged entitlement to and prayed for exemplary damages.

In the trial court, Suthers disputed that the hospital district and its classes of residents were third party beneficiaries who had standing to sue on his written agreement with the Scholarship Fund. He affirmatively confessed his liability to the Scholarship Fund for the monies, bearing the contractual rate of interest, advanced to him.

Over Suthers’ objection that the issue was one of law, the trial court submitted to the jury special issue no. 1 reading:

Was the agreement of the Defendant set forth in the 1966 Scholarship Agreement to reside in, and practice medicine in, Booker for ten years intended for the direct benefit of the Plaintiff class of residents of the later to be formed Booker Hospital District?

The jury’s answer of “Yes” and its response to the other special issues formed the basis of the court’s 15 August 1975 judgment decreeing that from Suthers:

1)Bulah Peery Memorial Scholarship Fund, Inc., do have and recover the sum of $15,816.49 (the amount of advancements plus accrued interest), together with interest thereon at the rate of seven per cent (7%) per annum from August 1, 1975;

2) Booker Hospital District and the subclass of resident taxpayers of the district recover the sum of $110,000 (the reduced market value of the medical clinic found by the jury to result from Suth-ers’ decision to practice in Booker for only five weeks), together with interest thereon at the rate of six per cent (6%) per annum from date; and

3) The residents of the Booker Hospital District recover the sum of $1,000 (the damages found by the jury to result from Suthers’ decision not to practice medicine in Booker for more than five weeks), together with interest thereon at the rate of six per cent (6%) per annum from date.

The court ordered that the sum of $13,-898.38, which had been deposited in the registry of the court as the result of garnishment proceedings against Suthers, be applied on, and to that extent discharge, the judgment in favor of the Bulah Peery Memorial Scholarship Fund, Inc. Further, the court ordered that the recoveries by the Booker Hospital District and its classes of residents be applied to discharge the obligations and indebtedness of the hospital district.

On appeal, Suthers does not challenge that portion of the judgment in favor of the Bulah Peery Memorial Scholarship Fund, Inc.; indeed, he judicially admits his liability for the amount of the judgment in favor of the Scholarship Fund and his willingness to pay it, as well as his liability for the contractual fifty per cent penalty which the Scholarship Fund did not impose. The challenge, rather, is to those portions of the judgment decreeing recoveries by the parties claiming third party beneficiary status. In this connection, Suthers has perfected, by his points of error numbered three through six, this two-pronged presentation: the court erred in inquiring of the jury in special issue no. 1 the legal meaning of the agreement; and the jury’s answer to the issue is insupportable for, as a matter of law, Suthers’ written agreement with the Scholarship Fund was not intended to benefit directly the hospital district and its residents as third party beneficiaries so as to give them standing to sue thereon.

Absent any ambiguity in the contract, and none is suggested here, it is elementary that its construction is a question of law for the court. Myers v. Gulf Coast Minerals Management Corporation, 361 S.W.2d 193, 196 (Tex.1962); Tower Contracting Company, Inc., of Texas v. Flores, 157 Tex. 297, 302 S.W.2d 396, 399 (1957). It follows that it was error for the trial court to submit the question of law embraced in special issue no. 1 to the jury, and the question is one to be resolved by established principles of law.

The presumption in Texas is that the signatory parties contract only for themselves; hence, a contract will not be construed as having been made for the benefit of a third party not privy thereto, and he has no right of action thereon, unless it clearly appears such was the intention of the contracting parties. Knox v. Ball, 144 Tex. 402, 191 S.W.2d 17, 21, 164 A.L.R. 1453 (1945); Citizens Nat. Bank in Abilene v. Texas & Pacific Ry. Co., 136 Tex. 333, 150 S.W.2d 1003, 1006 (1941). To qualify as one for whose benefit the contract was made, the third party must show that he is either a donee or a creditor beneficiary of, and not one who is benefited only incidentally by, the performance of the contract, B & C Construction Company v. Grain Handling Corporation, 521 S.W.2d 98, 101 (Tex.Civ.App.-Amarillo 1975, no writ). In Section 356 of Professor Williston’s Treatise on the Law of Contracts, Third Edition (1959), the respective third party beneficiaries are defined thusly:

(1) One “is a donee beneficiary if the purpose of the promisee in obtaining the promise of all or part of the performance thereof, is to make a gift to the beneficiary, or to confer upon him a right against the promisor to some performance neither due [nor supposed] or asserted to be due from the promisee to the beneficiary;”

(2) One “is a creditor beneficiary if no intention to make a gift appears from the terms of the promise, and performance of the promise will satisfy an actual [or supposed] or asserted duty of the promisee to the beneficiary;” and

(3)One “is an incidental beneficiary if the benefits to him are merely incidental to the performance of the promise and if he is neither a donee beneficiary nor a creditor beneficiary.”

Generally, whether a contract was intended for the benefit of a third party depends upon the construction of the instrument whose clear language must be given its plain meaning. Transport Ins. Co. v. Standard Oil Co. of Texas, 161 Tex. 93, 337 S.W.2d 284, 288 (1960). The intention of the contracting parties is gathered from the entire instrument construed as a whole, Southland Royalty Company v. Pan American Petroleum Corporation, 378 S.W.2d 50, 53 (Tex.1964), as manifested by the terms employed in the light of the attending circumstances, Banker v. Breaux, 133 Tex. 183, 128 S.W.2d 23, 24 (1939), there being the presumption that the parties embodied their entire agreement in the written instrument. Danciger Oil & Refining Co. of Texas v. Powell, 137 Tex. 484, 154 S.W.2d 632, 635 (1941).

Given the established principles, pri- or opinions, construing as they do agreements of widely differing terms, offer no precedents, but only assist in analysis; the determination of the parties’ intention must depend upon the particular circumstances of each case. The intention, then, is settled by the application of the pertinent principles of construction to the instrument’s wording, which is considered in the light of the surrounding circumstances. City of Pinehurst v. Spooner Addition Water Company, 432 S.W.2d 515, 519 (Tex.1968). Accordingly, the decision whether the Bulah Peery Memorial Scholarship Fund, Inc. and Neal K. Suthers intended the performance of their 1966 agreement to directly benefit the third party beneficiary claimants depends upon the intention they manifested by the expressions they employed in the light of the attending circumstances.

Introductory to setting forth their mutual understanding in writing, the contracting parties declared that they “have made the following agreement and desire same to be reduced to writing in order to avoid any misunderstanding and to have a permanent record of the agreement.” At the time of the agreement in 1966, the Booker community had been without the services of a local doctor since 1943. The Scholarship Fund was utilized by citizens interested in the effort to secure the future medical services of Suthers and by Suthers as the means of financing his formal medical education. Although Suthers agreed that when the agreement was being formalized he considered the possibility that “things might turn out just the way they have,” it was not contemplated by the nego-tiatory citizens who bound the Scholarship Fund that Suthers might not come to Booker or might not stay; and, furthermore, the citizens did not conceive as a possibility any damages beyond the repayment of the funds advanced. These citizens and Suth-ers furnished the information concerning their agreement to an attorney for his drafting of their written agreement.

The attorney testified that the executed agreement “covered what I was asked to do”; that he tried “to cover the major points” and “the problems,” acknowledging that he “didn’t intentionally omit any major item that was discussed”; that there was “(v)ery little discussion on” the fact that a medical facility might be built, but enough to provide for the option clauses in paragraph IV of the agreement, including the penalty clause inserted as an “inducement” for Suthers to come to Booker and practice medicine, particularly after a consideration of the possibility that he might leave after the medical facility was built. The citizens felt the agreement was for the benefit of the community, but no one expected Suth-ers to provide his medical services free of charge.

Preliminarily to considering the language of the agreement, it should be noticed that the third party beneficiary claimants make no contention that the Scholarship Fund’s purpose in obtaining Suthers’ written promise either to practice or to pay was to make any gift to them as donee beneficiaries. Neither do they contend that Suthers’ promissory performance would satisfy any duty of the Scholarship Fund to them as creditor beneficiaries. Rather, what the third party beneficiary claimants do contend is that once they provided the medical facility, the agreement conferred upon them as donee beneficiaries the right to the performance of Suthers’ promise to practice medicine in Booker for ten years. Necessarily implicit in the contention is the further right to recover from Suthers damages, which are different from and in excess of those specified by the contracting parties, if Suthers failed to practice medicine in Booker for the ten year period.

Turning to the agreement itself, it is at once apparent that it contains no language definitively stating that the agreement made by the contracting parties shall inure to the benefit of third parties; indeed, the specific expressions embrace no more than the faithful performance promised by the signatory parties to each other. It is true, as the third party beneficiary claimants state, that it was expressly contemplated' that the citizens of the community would diligently attempt to create a hospital district, pass a bond issue, and construct a medical facility, which they did, and, if the facility had not been furnished, Suthers would not have been obligated to practice medicine in Booker for ten years. From this premise, the claimants argue that the contracting parties expressed the intent to benefit directly, and not incidentally, the class of residents and subclass of resident taxpayers of the Booker Hospital District. This is a non sequitur. The agreement contains no language stating that such was the intent of the contracting parties. The contractual expression of contemplated effort which the third party beneficiary claimants in fact exerted is not sufficient, without more, to constitute them third party donee beneficiaries; they must, to establish their theory, go further and show that by the language of the entire agreement, as it reflected the attending circumstances, the contracting parties manifested the intention that the third party beneficiary claimants would have a right to Suthers’ medical services in Booker for ten years if they constructed the medical facility.

When the language of the entire agreement is considered in connection with the circumstances out of which it arose, it seems clear that the contracting parties had no intention of making the claimants third party beneficiaries. After contemplating that others would make the effort to construct a medical facility, the absence of which would relieve Suthers of all obligations save the repayment of funds received, the contracting parties did not express an obligation by Suthers to practice in the community for ten years if the facility were constructed. Instead, the parties plainly stated that their agreement was that if the medical facility was constructed, Suthers had the option to practice for ten years and be relieved from repaying any part of the loan or, in lieu thereof, to repay the loan with interest and possibly a penalty. This was the language selected “to cover the major points” of the understanding with the “very little discussion” about a medical facility and a consideration that Suthers might leave after the facility was built leading only to the inclusion of the option clauses in paragraph IV. To intend that Suthers would assume an obligation to third party beneficiaries over and beyond that stated in the agreement would be a major point, but any major item that was discussed was not omitted from the agreement.

Linguistically and circumstantially, then, the contractual expression of contemplation was merely a predicate for another option the contracting parties intended Suthers to have and for which they expressly provided in paragraph IV. This is made more obvious by the lack of language imposing a duty upon Suthers to use any facility made available. Moreover, there is no expression of any terms or conditions under which Suth-ers would be permitted, much less required, to use the facility. And certainly there is no suggestion that anyone is, or would be, entitled, by virtue of the agreement, to demand medical services from Suthers. Furthermore, it must be deemed significant that the only security for the performance undertaken by Suthers was the insurance coverage for the benefit of the Scholarship Fund and not for any third party.

In short, to accept the contention of the third party beneficiary claimants requires the holding that the intention to make the claimants third party donee beneficiaries was so clearly within the contemplation of the contracting parties that they deemed it unnecessary to express it and, therefore, specifically omitted to express it. That holding would be at variance with the language used in, and the circumstances attending the execution of, the agreement.

In view of the foregoing, the hospital district and its classes of residents are only incidental beneficiaries of the agreement reached between Suthers and the Scholarship Fund and, consequently, they have no right of action for a breach of the agreement. Accordingly, Suthers’ points three through six are sustained. His judicial admission of his liability for, and his willingness to pay, the judgment rendered against him in favor of the Scholarship Fund has mooted his remaining points. For this reason, no opinion is expressed about either the merits of those points or the complaints contained therein concerning the measure of damages applied in favor of the third party beneficiary claimants or the validity of the garnishment proceedings.

That portion of the judgment rendered against Neal K. Suthers, M. D., and in favor of the Bulah Peery Memorial Scholarship Fund, Inc., is affirmed. That portion of the judgment rendered against Neal K. Suth-ers, M. D., and in favor of the Booker Hospital District and the subclass of resident taxpayers and in favor of the residents of the Booker Hospital District is reversed, and judgment is here rendered that the Booker Hospital District and its classes of residents take nothing by virtue of the causes of action asserted by them. Costs are assessed against Neal K. Suthers, M. D. Rule 435, Texas Rules of Civil Procedure.